The Housing Bubble

NAR $40 million dollar ad campaign lies:

“Showing how perilous the art of forecasting can be, the ad by the National Association of Realtors cites a 4.3 percent increase in the number of existing home sales contracts signed in August, from July, as evidence that “prices over all have stabilized.”

But Wednesday, new data released by the association showed that contract signings fell 1.1 percent in September, from August, and 13.6 percent from September 2005. A spokesman said that the first ads were prepared before the latest figures were available and would be updated next week.

Mr. Stevens dismissed the idea that the campaign, the first of its kind undertaken by the association,
—>>>>could be viewed as a sign of desperation

In Northern Va…
“I put a deposit on a condo 2 years ago (BEFORE the market peaked), and cannot go through with the sale. You can get it for the SAME price it was 2 years ago!!”
http://washingtondc.craigslist.org/nva/rfs/230444630.html

ONE STEP FORWARD, TWO BACK
“The problems are too large for a little jump in income one month to help out.”

Tucker Hart Adams, a regional economist for US Bank, on a federal report that personal income rose faster than expected in September. Adams has forecast a recession in late 2007.

Tucker Hart Adams is a respected economist in the Denver area.

Just want to share an anecdote. In 1999 when Lucent stock went from 82 to 72, my office mate got a mortgage on his fully paid house, because LU had dropped to 72 and he could not resist! Yes, nobody could believe LU was down to 72, and it was a screaming BUY.

We are in the same stage in RE today, as when LU was down to 72. All bubbles play out the same way. The only difference is that the stocks are more liquid and move faster. RE is illiquid. The NASDAQ crash took a year, with RE you are looking at 5-10 years. Yes it is the start of a VERY slow motion train wreck.

Hey - Did anyone find out what the house in Desert Mountian auctioned for?

Anyone with Utah experience here? The housing market in Utah was stagnant until about two years ago. Since then, it has appreciated rapidly with some slowing (but still growth) in recent months. Everyone around here seems quite enthusiastic about the local market, but in light of the rest of the country I can’t help but being a little sceptical. There was not a bubble of rapid growth like other parts of the country so there might be something to that.

I would like to buy a home in Utah or Salt Lake county during the next year. Does anyone have a good crystal ball, local observations, or hard data?

Mish has some good stuff up about a busted Florida auction for 22 properties in Key West.

http://globaleconomicanalysis.blogspot.com

WSJ Opinion (p. A 14)
Monday, November 14, 2006

The Fed’s Confession

When it comes to admitting error, central bankers tend to emulate Benjamin Disraeli, who famously said “never complain, never explain.” So it was nothing short of astonishing last week for Richard Fisher, President of the Federal Reserve Bank of Dallas, to confess in public that the Fed had blundered by keeping monetary policy too easy for too long in 2003 and 2004.

Speaking to bankers in New York, Mr. Fisher issued a mea maxima culpa that deserves wide attention: “In retrospect, the real fed funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been.” As the nearby chart chows, a Fed worried about possible “deflation” moved the overnight interest rate it charges banks in June 2003 to an extraordinarily low 1% and kept it there for another year.

Mr. Fisher blamed this mistake on “poor data” that underestimated inflation, leading “to a policy action that amplified speculative activity in the housing and other markets. Today, as anybody not from the former planet of Pluto knows, the housing market is undergoing a substantial correction and inflicting real costs to millions of homewowners across the country.” In other words, the Fed itself is responsible for the current housing bust because its over-easy policy created a real estate frenzy that was bound to end once the Fed tried to regain control over inflation expectations.

Mr. Fisher was careful to say he was speaking only for himself. But we’d sure like to know what his Fed colleagues think of his argument — not least current Fed Chairman Ben Benranke, who was a Fed governor for much of that time and had been one of those fretting loudest about the risks of “deflation.” We can only assume that former Chairman Alan Greenspan is also preparing a chapter on this era for his memoirs.

Readers of these columns will not be surprised to learn that we think Mr. Fisher is correct and deserves credit for his candor. But the real import of his remarks isn’t 20-20 hindsight so much as a chance for the Fed, and much of the economic establishment, to rethink its inflation models. Mr. Fisher bluntly concedes that “most economic data are inherently backward looking, often to a disconcerting degree.” Thus the data the Fed was watching in 2003 suggested that prices were falling even as they were beginning to rise.

But this lets the Fed off the hook a little too easily. Throughout this period, and especially into 2004, there was plenty of other “data” flashing yellow and then red about rising inflation. The dollar was weak, both against other major currencies and especially against gold, which began a price surge not seen since the 1970s. Commodity prices across the board — notably oil — also began a rise that to our mind couldn’t be explained merely by an increase in relative global demand. And there were also rising price pressures in dollar-bloc countries overseas, notably in China.

The question for Fed governors is why they discounted this evidence of real-time rising prices. Instead, Mr. Fisher says they were watching their own alphabet-soup of price indexes, such as the CPI and PCE, all of which look through the rearview mirror. That’s assuming they were even watching prices at all, rather than the job market or the “output gap”, or other measures that are dubious guides for monetary policy. The best guide for maintaining stable prices is to watch ‘actual prices,’ or what economists call a price rule.

To be fair to the Fed, its policy decisions in the wake of the stock-market collapse were stellar through 2002. And in the years since it has had plenty of company in chasing “poor data.” Most Wall Street economist and Beltway politicians were only too happy to cheer on the Fed as it kept its foot on the money accelerator. Some of our supply-side friends also claimed to see no evidence of rising prices, even as home prices rose by double-digits year after year and second homes became investment plays. Inflations are always popular at the beginning, and this was no exception.

* * *

Which brings us back to the present. The Fed did finally recognize that inflation was a problem, and the consequences of its own policy correction are now being felt in the economy, especially housing. As Mr. Fisher conceded last week, the housing slump “Is complicating the task of achieving our monetary objective of creating the conditions for sustainable non-inflationary growth.” Translation: We may have to tighten money further to restore stable prices, but we’re aftraid we’ll tank the economy if we do. This is the dilemma the Fed’s easy-money mistake has made for itself, and for the rest of us.

The good news is that the economy entered this rough patch with considerable momentum that may yet avoid a Fed-induced recession. The incentives from the 2003 tax cuts remain in place and have helped ot boost investment and corporate profits. As last Friday’s blowout October jobs report showed, the labor market remains strong and wages are increasing. If we’re lucky, rising incomes will keep consumers spending even if their home values decline. Also if we’re lucky, Tuesday’s election results will not produce a reversal on tax policy; if anything, we may need another tax cut in the next year or two if the Fed tightens further.

As for the Fed, our reading of history is that the sooner it acts to restore price stability, the better the prospects for long-run growth and prosperity.

Even though Fisher recently admitted the Fed didn’t know what it was doing when it lowered interest rates back in 2002 and 2003 due to “bad data” somehow Moskow believes the economy will bounce back in the fourth quarter of 2006 and the economy will grow slightly below 3% in 2007. Oh yeah and its no big deal if the housing industry tanks because it only accounts for 5% of GDP according to Moskow.

Does the Fed believe its own fairy tales or is it just playing dumb?

From MarketWatch:

http://tinyurl.com/t4z8l

going on when it lowered interest rates from 200

This is a test. None of my posts worked yesterday. I am trying to see if this one will go through.

Desperate realtors . . . desperate housewives

http://www.rgemonitor.com/blog/roubini/155898

I like this website:

http://www.building-cost.net

You answer some questions about the features in a house and they calculate how much it would cost to build. I just tried it for that 1.1 M 835 sq-ft shack in Coronado (from yesterday’s discussion). I had to guess on a lot (a “poor” kitchen), but the webstie calcuated that the 1.1M POS would cost ~$94K to build.

for all of you renters out there. always check with a foreclosure listing company before renting. there are actually owners out there still trying to rent flips out even with the auction just 1 month away.

Bubble Markets Inventory Tracking

“I didn’t get the “housewife” part of that, but I’ve already made a MILF reference on this thread so I’ll shut up.”

It’s in his title, wasn’t my idea…

Auctions, contests, raffles, exotic/prosaic throw-ins (how about a boat? or a Ford Focus? or a year’s HOA’s paid?), and my-loss-is-your-gain stories. all designed to disintermediate/distract buyers from taking a rational look at the market. it’s great — the more “unique” approaches you see, the more you know the market’s in trouble, and that a given seller can’t/won’t accept lowering the the price.

You know comments like “he’s not that into you” or JDTMFA (”just dump the mo-fo already”) — we need one that pithily captures “just lower the price”

http://uk.news.yahoo.com/06112006/325/million-pound-starter-home-2024.html

Million pound starter home by 2024
Monday November 6, 04:51 PM

LONDON (Reuters) - First-time buyers will have to fork out a cool million pounds to get a foothold on the property ladder in less than 20 years, data showed on Monday.

The average first-time buyer home in the UK will hit the million pound mark in the second quarter of 2024, if the current trend in house price and income growth continues, according to Stroud & Swindon Building Society.

It said that would equate to seven times the average salary, projected to be 146,188 pounds by then, if earnings continue to increase at current levels.
Those in Greater London will see the average first-time buyer property price soar above 1 million pounds the soonest — within 12 years — if house price inflation is maintained at the same rate of the past decade.

The typical first-time buyer home would hit that price within 16 years in the south-east of England and 17 years in the south-west.

Property in Scotland would take the longest to achieve that price, reaching the one million mark in 29 years.

Paul Chafer, sales director at Stroud & Swindon, said the “shocking picture of a potential future” suggested the next generation could put off buying property or other life goals, such as marriage or children, to get on the property ladder.

“Most people aspire to owning their own home, but this research shows that our children are going to find it very difficult to get onto the housing ladder,” he said.

“Even if house price increases slow down to more acceptable levels, in future first-time buyers are going to be forced to put off purchasing their first home even longer and have to rely increasingly on the ‘bank of mum and dad’ to help with the deposit.”

The findings come after the country’s second largest mortgage lender, Abbey, increased the amount it will typically lend to up to five times income to help struggling first-time buyers.

But Chafer said it was pointless to increase income multiples if it would result in consumers taking on levels of debt they could not service.

The projections are based on Office for National Statistics figures that show the cost of an average first-time buyer home has risen 11.5 percent per annum since 1996. The average income has increased at a rate of 7.4 percent per year over the same period.

In the “kill the messenger” department…
—————————————————————————–
GINA LUBRANO READERS REPRESENTATIVE
A changing housing market is news
November 6, 2006

Writing about the real estate market in San Diego is a no-win situation. When the market was hot and prices and property sales were booming, some people who couldn’t afford to buy blamed The San Diego Union-Tribune specifically and the media in general, saying their stories were driving housing prices to impossible heights, robbing them of their dream of ownership.

Now that we’re in a cooling period, reporters are hearing from homeowners who accuse the newspaper of trying to frighten them with “scary headlines.” A story last month prompted a reader to accuse the newspaper of being irresponsible, of trying to cripple the real estate market.

A story in the Home section yesterday may have added to his suspicions. It said that since January 2004, single-family home prices are down countywide on a year-over-year basis and that prices in all but three ZIP codes in the county have dropped from their all-time-high median prices.

Roger Showley, the reporter who wrote the story, pointed out that statistics about housing sales, whether up or down, are based on the same source, a service called DataQuick Information Systems, which follows the market. DataQuick’s analysis stems from a historic perspective of nearly 20 years. The conclusions are not based on the word of a neophyte real estate agent who has experienced a good month or a bad month and is on top of the world or in the doldrums.

Carl Larsen, editor of the Sunday Home section, notes there is no doubt that the market is declining and that even trade associations representing realtors and home builders acknowledge it’s the case.

But the housing market is news for other reasons. Those following it are not just homeowners worried that their equity is slipping, Larsen said.

“There are broader ramifications for San Diego and the entire national economy,” he said, adding that housing price increases in recent years have played a key part in the economy’s growth.

“It could be argued that anyone in mortgage banking, in construction or those who sell appliances at Home Depot or Best Buy depends on the newspaper to report the direction of an industry that directly affects their livelihood. That’s a consideration far different than those who monitor prices to gauge rising or falling equity of their homes.”

He said stories about the declining housing market are bolstered by other signs. “Countrywide Mortgage, the nation’s largest, has announced major layoffs.” He said that publicly held building companies have acknowledged declining expectations on housing sales in their press releases about earnings. As for mortgages, “major concerns have arisen, including warnings from the U.S. government, on the growth of adjustable-rate or zero-interest mortgages. Foreclosure rates are up sharply.”

That, too, has been the stuff of headlines.

Larsen said he understands why people are concerned about negative stories. “But at the same time, it would be unfair and irresponsible not to report fully the sudden about-face of a housing market in a city that many experts have said led the national run-up in prices.”

http://www.signonsandiego.com/uniontrib/20061106/news_mz1e6lubrano.html

I am curious to see how reverse mortgages will play out in the years to come. Not knowing anything about them, but I suppose they will get some scrutiny as real estate prices fall.

“”Writing about the real estate market in San Diego is a no-win situation. When the market was hot and prices and property sales were booming, some people who couldn’t afford to buy blamed The San Diego Union-Tribune specifically and the media in general, saying their stories were driving housing prices to impossible heights, robbing them of their dream of ownership.”

No, they didn’t. And even if they did, you did not write a story about their comments.

Don’t forget to vote!!! No bitching rights unless you do.

From the Sunday Seattle Times:

“A real estate lawyer has been sentenced to a year and a half in prison and fined $6,000 for laundering money from drug traffickers through real estate investments…. Joel Manalang, 37, who operated an escrow business, recieved large quantities of cash from clients in 2003 and 2005 under circumstances that indicated the money was from drug profits. The money was delivered to Manalang in shoeboxes and duffle bags. He then engaged in financial transactions with the money, helping drug traffiakers buy real estate, accoring to court records. He pled guilty August 1…

‘What makes this most difficult to understand is that law enforcement visited him during 2005 and warned him against such activities, ‘ Assisitant US Attorney Ron Friedman said.”

Gee, looks like he was addicted to the easy money and just couldn’t help himself in spite of warnings from law enforcement. Something is really wrong with this picture. Looks like they’ve known for quite a while that money’s been being laundered through RE transactions in the mega bubble cities.

And why not? Great deal to hide your drug profits in RE then cash it in a year or 2 later for 100% or more profit.

1 and 1/2 years in prison then 2 years supervised release afterwards.

Can any of our local experts please explain the kabuki dance also known “as sending letters of default?” In particular, (1) is this bad news for KBH, and (2) should we expect the stock price to rally in response?
————————————————————————————
KB Home Receives Additional Letters Regarding a Notice of Default Related to Its Senior and Senior Subordinated Notes
Last Update: 5:01 PM ET Nov 6, 2006

LOS ANGELES, Nov 06, 2006 (BUSINESS WIRE) — KB Home (Last: 43.55+0.26+0.60% 4:49pm 11/06/2006), announced today that on November 2, 2006 it received letters from US Bank stating that they are notices of default with respect to KB Home’s 7-1/4% Senior Notes due 2018, 6-1/4% Senior Notes due 2015, 5-7/8% Senior Notes due 2015, and 5-3/4% Senior Notes due 2014 and with respect to KB Home’s 8-5/8% Senior Subordinated Notes due 2008, 7-3/4% Senior Subordinated Notes due 2011, and 9-1/2% Senior Subordinated Notes due 2011. US Bank states in the letters that it is the successor trustee under the indentures for each of the foregoing Senior and Senior Subordinated Notes.
The letters state that KB Home is in default under the indentures because it has not delivered to the trustee a copy of KB Home’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2006 (the “Third Quarter 10-Q”).

KB Home is reviewing the letters, as well as other similar letters the Company has previously announced receiving, and is considering their validity as notices of default. Under the indentures, if KB Home fails to cure a default within the 60 days after notice is effectively given, the default could become an “event of default,” allowing the trustee or the holders of at least 25% in aggregate outstanding principal amount of a series of notes issued under such indenture to accelerate the maturity of such series.

As previously announced, KB Home is soliciting consents from the holders of record as of 5:00 p.m. (New York time) on October 24, 2006 of its Senior Notes, to approve a proposed amendment to the indenture for its Senior Notes to extend the time for the Company to file the Third Quarter 10-Q no later than February 23, 2007. The consent solicitation will expire at 5:00 p.m. (New York time) on November 7, 2006, unless extended.

http://tinyurl.com/vl3qv

Matt Drudge is getting into the bubble reporting

http://www.drudgereport.com/

PHOENIX HOUSING BONANZA HAS TURNED BUST… DEVELOPING…

I’m interested in any data that compares the available housing (ie., those 900,000 extra units that no-one lives in) with the demographics of folks who are the ‘buyers waiting in the wings’. My suspicion is that those who could afford to buy up already did, and that a lot of the houses that were built are not going to be affordable to a large number of the wannabee buyers, no matter how steeply discounted. Does anyone have comment/data on this? No offense intended for anyone on this blog who was smart enough to remain a renter…..

News from Aus:

http://www.abc.net.au/worldtoday/content/2006/s1782040.htm